THE FEDERAL RESERVE AND THE FINANCIAL CRISIS

Federal Reserve Chairman Bernanke (Essays on the Great Depression, 2000, etc.) presents his views on the Federal Reserve System, central banking and the financial crisis in four lectures given to students during the course of 2012.

The author examines what the Federal Reserve was intended to accomplish, how it performed its statutory task as it evolved over time and the special functions of the lender-of-last-resort that have been called upon during the financial crisis. These lectures provide a useful primer on matters not often presented in such a comprehensive or unequivocal way. Bernanke's reputation is often identified with his expertise on the Great Depression. Here, he presents himself differently, as a practitioner of central banking. Thus, his views on the Federal Reserve, called on by statute “to serve as a lender of last resort and to try to mitigate the panics banks were experiencing every few years,” come into sharp relief relative to his presentation of what has gone amiss in the financial sector. He argues that the regulatory structure of finance failed to keep up with the structure of financial institutions. The private sector took advantage, using weaknesses in risk management, the increasing complexity of financial transactions and the reliance on short-term funding and leverage to do so. Bernanke views the subprime mortgage crisis as the lesser part of a much larger threat to the global financial system, and he shows how AIG's triple A credit rating was used to backstop these developments through default swaps. “In our estimation,” he told the students, “the failure of AIG would have been basically the end.”

A great introduction to the functioning of central banking for general readers.